Question

Suppose GDP is 15 trillion dollars , with 8 trillion coming from consumption, 2.5 trillion dollars coming from gross investment, 3.5 trillion dollars coming from government expenditures, and 1 trillion dollars coming from net exports. Also suppose that across the whole economy, personal income is 12 trillion dollars . If the government collects 1.5 trillion dollars in personal taxes, then disposable income will be: a. $$ 13.5\( trillion. b. $$ 12.0\) trillion. c. 10.5 trillion. d. None of the above.

Short answer

The disposable income is 10.5 trillion dollars (option c).

Step-by-step solution

Understand Disposable Income

Disposable income is the amount of money individuals have available to spend or save after paying taxes. It's calculated by subtracting personal taxes from personal income.

Identify the Given Variables

We know that the personal income is 12 trillion dollars and the government collects 1.5 trillion dollars in personal taxes.

Set Up the Equation

To find the disposable income, use the formula:\[\text{Disposable Income} = \text{Personal Income} - \text{Personal Taxes}\]

Substitute the Values

Substitute the given values into the equation:\[\text{Disposable Income} = 12 - 1.5\]

Calculate the Result

Perform the subtraction:\[12 - 1.5 = 10.5\]Thus, the disposable income is 10.5 trillion dollars.

Key concepts

Gross Domestic Product

Gross Domestic Product, or GDP, is a measure of the economic performance of a country. It captures the total market value of all final goods and services produced in a country within a specific period. In this scenario, the GDP is given as 15 trillion dollars. This figure is broken down into several components:

• Consumption: 8 trillion dollars
• Gross Investment: 2.5 trillion dollars
• Government Expenditures: 3.5 trillion dollars
• Net Exports: 1 trillion dollars

By summing up these components, we see how the GDP is structured: it consists of spending by consumers, businesses, the government, and the net exports arising from the difference between a country’s exports and imports.

Personal Income

Personal income refers to the total earnings received by individuals and households within an economy. This includes wages, salaries, dividends, interest, and any other type of personal revenue. In our example, personal income is 12 trillion dollars.

Personal income is crucial because it provides an insight into the earning capability of the population. It influences spending habits, savings, and investment decisions of individuals, which in turn affect the overall economy. Understanding personal income helps in assessing the financial health of individuals and how they contribute to the national economy.

Personal Taxes

Personal taxes are the taxes paid by individuals on their personal income. Governments use personal taxes as a primary source of revenue to fund public services and infrastructure. In our example, individuals across the country pay 1.5 trillion dollars in personal taxes.

It is important to track personal taxes because they directly impact disposable income. Higher taxes mean less income available for personal spending and savings. Tax policies affect economic behavior and can influence economic growth by altering how people choose to work, save, and spend.

Consumption

Consumption is the total value of all goods and services consumed by households and individuals. It comprises a significant part of the GDP and reflects the everyday expenses of the population, including food, housing, fuel, and more. In this example, consumption accounts for 8 trillion dollars out of the total GDP.

Consumption is key to economic growth. When consumption levels are high, businesses expand to meet demand by increasing production, which can lead to more jobs and higher income levels. Conversely, a decrease in consumption typically signals economic downturns, as businesses see reduced revenue.

Government Expenditures

Government expenditures are the total amount of public spending by the government. This includes spending on infrastructure, education, defense, and other public services. In our scenario, government expenditures contribute 3.5 trillion dollars to the GDP.

Such spending is vital for supporting economic activities and maintaining public services. It can inject money into the economy, create jobs, and foster an environment conducive to economic growth. Government expenditures help address market failures and provide goods and services that might not be efficiently supplied by the private market.

Net Exports

Net exports represent the difference between a nation’s exports and imports. It is a critical part of the GDP calculation and reflects a country's trade balance. In this example, net exports add 1 trillion dollars to the GDP.

A positive net export figure indicates that a country exports more than it imports, contributing positively to GDP. A negative figure suggests the opposite. Net exports are influenced by global trade policies, currency exchange rates, and international demand for a country's goods and services. They play an essential role in shaping the economic interaction between countries.